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EBRD invests in new segment of Russian service market

By Richard Wallis

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A 1.8 billion rouble (EUR 40 million) EBRD convertible loan being made as part of a joint investment aims to help develop a new segment of the Russian service sector, the textile rental market. The goal is to make it more energy efficient while encouraging diversification both in other business niches and Russia’s regions.

The investment in Cottonway Ltd., the holding for one of the leading players in this market, is being made in parallel with the Russian Direct Investment Fund (RDIF), which is also providing 1.8 billion roubles. The two transactions are being made on the same terms and conditions.

RDIF, Russia’s newest sovereign wealth fund, is a subsidiary of Russia’s Vnesheconombank (VEB).

The textile rental market was virtually non-existent in Russia up to seven years ago but took off in 2008 when Russian state railways (RZD) decided to spin off its in-house laundry services, a non-core activity then badly in need of new investments.

The Cottonway group was one of the pioneers in the market’s evolution and now handles about 40 percent of RZD’s volumes in this business segment. The state railways remain the group’s single biggest customer. However, the client’s strategy is to continue diversification into the healthcare sector, hotels and fitness clubs.

In addition to traditional laundry services, the textile rental market offers the delivery of packaged uniforms, towels, mats and bed linen in required condition.

The total value of this market in Russia last year was estimated to be USD 1.2 billion, a fraction of what it is worth in the United States and western Europe. Outsourcing has made an even smaller impac, accounting for 40 to 50 percent of the market.

Laundry services, which in Russia still account for over 90 percent of this market, leave a significant footprint on the environment.

However, thanks to the planned introduction of state-of-the-art technology, the project will achieve a 50 percent more efficient use of water once the client has used the funds provided by the EBRD and RDIF to build various new laundry facilities that will allow the company to replace the premises it is currently leasing.

For gas, the savings are forecast at 25 percent while 10 percent less electricity will be consumed and 15 percent less detergents.

Cottonway is largest provider in this segment and is currently able to handle 400 tonnes of textiles a day. It employs about 2000 staff. The investment is due to give both the EBRD and RDIF one seat each on the company’s board of directors.

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